Why Donald Trump’s tax cuts for the rich won’t make America great again

The impulsiveness and shallowness of America’s president threaten the economy as well as the rule of law. Graphic: The Economist

Donald Trump’s plan to lower taxes and deregulation, to “incentivise” investors and “free up” the economy won’t work because it never worked in the past.

When Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. Instead, growth slowed, tax revenues fell, and workers suffered. The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates.

Here’s Trump’s dilemma. His tax reform must be revenue neutral. That’s a political imperative: with corporations sitting on trillions of dollars in cash while ordinary Americans are suffering, lowering the average amount of corporate taxation would be unconscionable – and more so if taxes were lowered for the financial sector, which brought on the 2008 crisis and never paid for the economic damage. Moreover, Senate procedures dictate that to enact tax reform with a simple majority, rather than the three-fifths supermajority required to defeat an almost-certain filibuster by opposition Democrats, the reform must be budget-neutral for 10 years.

Most economists would agree that America’s current tax structure is inefficient and unfair. Some firms pay a far higher rate than others. Perhaps innovative firms that create jobs should be rewarded, in part, by a tax break. But the only rhyme or reason to who gets tax breaks appears to be the effectiveness of supplicants’ lobbyists.

But there’s the rub: the money must come from someone’s pocket. Import prices will go up. Consumers of cheap clothing from China will be worse off. To Trump’s team, this is collateral damage, the inevitable price that must be paid to give America’s plutocrats more money. But retailers such as Walmart, not just its customers, are part of the collateral damage, too. Walmart knows this – and won’t let it happen.

A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense. Trump is not that leader. If corporate tax reform happens at all, it will be a hodge-podge brokered behind closed doors. More likely is a token across-the-board tax cut: the losers will be future generations, out-lobbied by today’s avaricious moguls, the greediest of whom include those who owe their fortunes to scummy activities, like gambling.

The sordidness of all of this will be sugarcoated with the hoary claim that lower tax rates will spur growth. There is simply no theoretical or empirical basis for this, especially in countries like the US, where most investment (at the margin) is financed by debt and interest is tax deductible. The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged. In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.

In a country with so many problems – especially inequality – tax cuts for rich corporations will not solve any of them. This is a lesson for all countries contemplating corporate tax breaks – even those without the misfortune of being led by a callow, craven plutocrat.

Joseph E Stiglitz is a Nobel prize winner in economics, professor at Columbia University, a former senior vice-president and chief economist of the World Bank, and one-time chair of the US president’s council of economic advisers under Bill Clinton.

Read the complete article on The Guardian web site.

Fact-checking Donald Trump’s first presidential address to Congress

Highlights from Donald Trump’s first speech to Congress.

Jobs, taxes and business

“Since my election, Ford, Fiat Chrysler, General Motors, Sprint, Softbank, Lockheed, Wal Mart, and many others have announced they will invest billions and billions of dollars in the United States and will create tens of thousands of new American jobs.”

Some of these corporations announced jobs and investment before the election, though Ford credited the president with its decision to create 700 jobs and make a $700m investment in Michigan. General Motors had committed $2.9bn and Walmart announced an expansion before any votes were cast, on the other hand, and several companies, including Chrysler, had previously agreed to create jobs.

“Ninety-four million Americans are out of the labor force.”

This is a grossly exaggerated claim that seems to rely on the roughly 94 million civilians who are 16 or older and not in the labor force: a figure that includes retired people, high school and college students, people with a disability, etc. The unemployment rate in January was 4.8%, or about 7.5 million people who are looking for work but can’t find it.

“Over 43 million people are now living in poverty, and over 43 million Americans are on food stamps.”

Trump is correct that about 43 million Americans are classified as living in poverty, according to the Census Bureau, after a small decline last year. He is also correct about 43 million people using food stamps, according to the Supplemental Nutrition Assistance Program. That number reached as high as 47.6 million people in 2013, during the slow recovery.

“We will create massive tax relief for the middle class.”

Trump’s tax plan cuts taxes for all Americans but, by a wide margin, disproportionately helps the wealthiest Americans. According to a conservative thinktank, the Tax Foundation, his plan would save wealthy Americans millions of dollars and add $5.3tn to the national debt. Half of Trump’s tax cuts would go to the top 1% of earners, the thinktank estimates, and most families below the top 20% of earners would have income gains of less than 1%.

“We’ve lost more than one-fourth of our manufacturing jobs since Nafta was approved, and we’ve lost 60,000 factories since China joined the World Trade Organization in 2001.”

According to a study by Ball State University’s Center for Business and Economic Research, slightly more than 10% of the manufacturing jobs lost since the 1970s were due to trade deals such as Nafta. The study estimated that 88% of factory jobs lost since the 1970s were eliminated by automation.

Economists still debate the effect of Nafta on jobs. In 2015, the Congressional Research Service wrote that the “net overall effect” was “relatively modest”. “Nafta did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters.” A 2012 report by the OECD found that manufacturing jobs did flee the US after the deal was signed, but also noted the broader shift toward a service economy.

Trump is correct that China has benefited from trade deals, such as the “most favored nation” status that Bill Clinton renewed for the country. But it too has started to feel the changes of robots replacing humans in the workforce.

“Right now, American companies are taxed at one of the highest rates anywhere in the world.”

The US is not even in the top 30 highest-taxed nations in the world, according to the Organization for Economic Cooperation and Development. The OECD’s most recent data ranks the US 31st of 34 industrialized nations for tax revenue as a percentage of GDP – far behind Denmark, Britain, Germany and Luxembourg. The US ranks 17th for corporate tax revenue, and 19th for tax revenue per capita.

“We have the worst financial recovery in 65 years.”

This claim is true only because the 2008 financial crisis was the worst economic collapse in American history except for the Great Depression, when people starved to death and moved constantly in search of work. In 1933 25% of all workers and 37% of all non-farm workers were out of work. After the 2008 financial crisis, the US lost 8.7m jobs – in October 2010, unemployment reached a peak of 10%. The recession itself lasted 18 months, officially.

“In the last eight years, the past Administration has put on more new debt than nearly all other Presidents combined.”

Trump mostly has this right, except that he ignores key context: Barack Obama inherited the Oval Office while the economy was in freefall, and after his predecessor had signed a huge stimulus bill. Obama continued the recovery efforts of George W Bush, with Republican support from Congress, which ultimately controls the purse strings of government.

“Our trade deficit in goods with the world last year was nearly $800bn.”

Trump has it almost correct that the trade deficit in goods alone neared $800bn; but he ignores the surplus in services, which reduces the deficit to about $502.3 bn, according to the Census Bureau. Economists say investment, something that Trump has welcomed, also contributes to a larger deficit.

Healthcare

“Obamacare is collapsing.”

The Affordable Care Act’s healthcare program does have problems, but it is not “collapsing” or in the much warned “death spiral” in which rising costs push healthy people out of the market, ever increasing fees and then pushing companies out as well. But healthcare premiums are increasing at varying rates around the country, on average by 22%, making an unstable market state-to-state. Rates were increasing before the law was enacted, however, and about 30 million people are enrolled in the program.

Immigration

“By finally enforcing our immigration laws, we will raise wages, help the unemployed, save billions of dollars, and make our communities safer for everyone.”

The economic benefit of Trump’s immigration plans is uncertain. The disappearance of undocumented workers could push Americans into agriculture and construction jobs over the long term, for instance, but it could also sow chaos in those industries in the short term. A fair amount of research suggests that immigration is good for the economy, and some US industries rely heavily on employees with visas (such as tech) or undocumented workers (such as agriculture).

If enacted, Trump’s plans would have also cost taxpayers billions. Trump’s promised wall would cost Americans about $21.6bn – Mexico has flatly refused to pay for it; aggressive deportation plans could cost billions more, especially if Trump greatly expands the number of federal border agents and the number of private prison contractors.

“We’ve defended the borders of other nations while leaving our own border wide open for anyone to cross and for drugs to pour in and at a now unprecedented rate.”

The US’s borders are not “wide open for anyone to cross”, with sections of wall and fencing along the southern border, 21,000 Customs and Border Patrol agents, and a recent history of aggressive deportation. Barack Obama has deported a record more than 2.5 million people, including a record 438,421 people in 2013. The US also has extremely strict vetting for visa applicants and refugees, forcing people to go through multiple rounds of interviews, background checks and medical screenings.

“Where proper vetting cannot occur … we cannot allow a beachhead of terrorism to establish itself in America.”

Trump’s suggestion that the US’s vetting methods cannot account for the systems of countries abroad has flipped the procedure of vetting on its head. The system, among the most intensive screening process in the world for refugees, relies on US agencies to vet applicants, and not those of countries abroad. Refugees must pass multiple background checks and interviews with several agencies, as well as medical checks, fingerprint and photo screenings. The process takes 18-24 months.

Foreign policy

“We’ve spent trillions and trillions of dollars overseas while our infrastructure at home has so badly crumbled.”
“America has spent approximately $6tn in the Middle East, all this while our infrastructure at home is crumbling. With this $6tn we could have rebuilt our country – twice.”

Trump does not specify what spending he’s referring to – though the wars in Afghanistan and Iraq have cost an estimated $4.79tn, according to a study by Brown University researchers.

Trump is correct that US infrastructure, in general, is in dire need of repair and reconstruction. In 2013, the American Society of Civil Engineers reported that the government needs to spend roughly $1.4 tn over the next decade, or $3.6tn by 2020, to overcome the shortfall in infrastructure funding.

Trump’s claim of $6tn is misleading: it includes estimates of future spending, including veterans care for decades in the future.

Crime

“Jamiel’s 17-year-old son was viciously murdered by an illegal immigrant gang member, who had just been released from prison.”

Trump’s anecdote suggests a link between immigrants and crime, but anecdotes about individuals do not paint an accurate picture of about 11 million people, most of whom are not violent offenders or aggravated felons.

On the contrary, presidential commissions and recent academic research has in general found no links between immigrants and crime or lower rates of crime correlated to cities with more immigrants compared to those with fewer immigrants.

“The murder rate in 2015 experienced its largest single-year increase in nearly half a century. In Chicago, more than 4,000 people were shot last year alone — and the murder rate so far this year has been even higher.”

Trump has accurately stated a statistic he often distorts. Last September, the FBI reported that murders and non-negligent manslaughter rose in the US by 10.8% in 2015, the largest single-year increase since 1971. That is not the same as saying there are more murders in the US than at any point since 1971: 15,696 murders were reported in 2015, down from 1991 high of 24,703. The murder rate declined 42% from 1993 to 2014, even though the population increased by a quarter.

Trump correctly cites Chicago’s number of shooting victims; the city has suffered a significant increase in gun violence in the last two years, though it has yet to reach the highs of the mid-1990s. This year has started even more violently than 2016 did, with at least 513 people shot so far in 2017. But fewer people have been killed compared with the same period in 2016, according to the Chicago Tribune, and police do not trust a few months’ worth of data to estimate a trend.

Also worth reading: An annotated guide to Trump’s first address to Congress.
Source for this fact-checking post: The Guardian newspaper article.

No Tax Cut for Rich – A Trump Tale

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Donald Trump and Treasury nominee Steven T. Mnuchin vowed there would be no tax cut for the rich. Yeah. Right.

The president has raised expectations among his working-class supporters that “the rich will pay their fair share,” and that “special-interest loopholes that have been so good for Wall Street investors, and for people like me, but unfair to American workers” will be eliminated. Mr. Mnuchin, soon to be one of the administration’s top economic policy officials, promised “a big tax cut for the middle class.”

Yet analyses of the president’s and the House Republicans’ plans consistently conclude that the wealthy will receive the largest tax cuts by far.

Start with the House blueprint, which at the moment is the closest thing to a working draft that exists. The nonpartisan Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, found “high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income.”

How big? “Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers,” if the plan were put into effect this year, it said. The highest-income households — the top 0.1 percent — would get “an average tax cut of about $1.3 million, 16.9 percent of after-tax income.”

Those in the middle fifth of incomes would get a tax cut of almost $260, or 0.5 percent, while the poorest would get about $50.

That split would worsen down the road, the Tax Policy Center says: “In 2025 the top 1 percent of households would receive nearly 100 percent of the total tax reduction.”

Those wary of any potential liberal bias could turn to the conservative-leaning Tax Foundation. Its analysis found a smaller gap between the wealthy and everyone else, but a gap nonetheless. The foundation concluded that four out of five taxpayers would see only a 0.2 to 0.5 percent cut in after-tax income, while those in the top 1 percent of the income scale would save at least 10 times as much, or 5.3 percent. That’s nearly $40,000 extra for those at the top, compared to $67 for those smack dab in the middle of the income scale.

Read the complete article in the New York Times.

What is Donald Trump likely to achieve in power?

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All that just about everyone can agree on is that Mr Trump promises to be an entirely new sort of American president. The question is, what sort?

For sure, Mr Trump is changeable. He will tell the New York Times that climate change is man-made in one breath and promise coal country that he will reopen its mines in the next. But that does not mean, as some suggest, that you must always shut out what the president says and wait to see what he does.

When a president speaks, no easy distinction is to be made between word and deed. When Mr Trump says that NATO is obsolete, as he did to two European journalists last week, he makes its obsolescence more likely, even if he takes no action. Moreover, Mr Trump has long held certain beliefs and attitudes that sketch out the lines of a possible presidency. They suggest that the almost boundless Trumpian optimism on display among American businesspeople deserves to be tempered by fears about trade protection and geopolitics, as well as questions about how Mr Trump will run his administration.

Start with the optimism. Since November’s election the S&P500 index is up by 6%, to reach record highs. Surveys show that business confidence has soared. Both reflect hopes that Mr Trump will cut corporate taxes, leading companies to bring foreign profits back home. A boom in domestic spending should follow which, combined with investment in infrastructure and a programme of deregulation, will lift the economy and boost wages.

Done well, tax reform would confer lasting benefits (see Free exchange), as would a thoughtful and carefully designed programme of infrastructure investment and deregulation. But if such programmes are poorly executed, there is the risk of a sugar-rush as capital chases opportunities that do little to enhance the productive potential of the economy.

That is not the only danger. If prices start to rise faster, pressure will mount on the Federal Reserve to increase interest rates. The dollar will soar and countries that have amassed large dollar debts, many of them emerging markets, may well buckle. One way or another, any resulting instability will blow back into America. If the Trump administration reacts to widening trade deficits with extra tariffs and non-tariff barriers, then the instability will only be exacerbated. Should Mr Trump right from the start set out to engage foreign exporters from countries such as China, Germany and Mexico in a conflict over trade, he would do grave harm to the global regime that America itself created after the second world war.

Just as Mr Trump underestimates the fragility of the global economic system, so too does he misread geopolitics. Even before taking office, Mr Trump has hacked away at the decades-old, largely bipartisan cloth of American foreign policy. He has casually disparaged the value of the European Union, which his predecessors always nurtured as a source of stability. He has compared Angela Merkel, Germany’s chancellor and the closest of allies, unfavourably to Vladimir Putin, Russia’s president and an old foe. He has savaged Mexico, whose prosperity and goodwill matter greatly to America’s southern states. And, most recklessly, he has begun to pull apart America’s carefully stitched dealings with the rising superpower, China—imperilling the most important bilateral relationship of all.

The idea running through Mr Trump’s diplomacy is that relations between states follow the art of the deal. Mr Trump acts as if he can get what he wants from sovereign states by picking fights that he is then willing to settle—at a price, naturally. His mistake is to think that countries are like businesses. In fact, America cannot walk away from China in search of another superpower to deal with over the South China Sea. Doubts that have been sown cannot be uprooted, as if the game had all along been a harmless exercise in price discovery. Alliances that take decades to build can be weakened in months.

Dealings between sovereign states tend towards anarchy—because, ultimately, there is no global government to impose order and no means of coercion but war. For as long as Mr Trump is unravelling the order that America created, and from which it gains so much, he is getting his country a terrible deal.

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How will Mr Trump’s White House work? On the one hand you have party stalwarts, including the vice-president, Mike Pence; the chief of staff, Reince Priebus; and congressional Republicans, led by Paul Ryan and Mitch McConnell. On the other are the agitators—particularly Steve Bannon, Peter Navarro and Michael Flynn. The titanic struggle between normal politics and insurgency, mediated by Mr Trump’s daughter, Ivanka, and son-in-law, Jared Kushner, will determine just how revolutionary this presidency is.

As Mr Trump assumes power, the world is on edge. From the Oval Office, presidents can do a modest amount of good. Sadly, they can also do immense harm.

From The Economist magazine article here.